Scopes of assets under IAS 36

IAS 36 applies to all tangible and intangible assets including those which have been revalued, except for following:

- Inventories under IAS 2 (Inventories)

- Contract assets in accordance with IFRS 15 (Revenue from contract with customer)

- Deferred tax assets in accordance with IAS 12 (Deferred tax)

- Assets arising under IAS 19 (Employee benefits)

- Financial assets under IFRS 9 (Financial instrument)

- Investment property measured at fair value under IAS 40 (Investment property)

- Biological asset under IAS 41 (Agriculture)

- Insurance contracts within scopes of IFRS 17 (Insurance contract)

- Non-current assets held for sale under IFRS 5 (Non-current asset held for sale and Discontinued operations)

An asset is impaired when its carrying amount exceeds its recoverable value.

1. Frequency of assessment on impairment losses

[IAS 36.9] At the end of each reporting period the company is required to review and assess whether there is any indicator of impairment. If yes, the company is required to make an evaluation of recoverable value and record impairment losses if incurred.

When there is no indicator for impairment, the company is not required to estimate recoverable value of the asset.

Special assets under IAS 36

Regardless of whether there is any indicator for impairment or not, following assets are required to be test annually. The impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different asset/CGU may be tested for impairment at different times. However, if the asset/CGU was initially recognized during the current annual period, the asset/CGU must be tested for impairment before the end of current annual period. These assets include:

(i) Intangible assets with an indefinite useful life

(ii) Intangible assets not yet available for use

(iii) Goodwill acquired in an business combination

Concept of materiality is applied that only material impairment loss is required to be measured and recognized.

2. Indicators for impairment losses

These are indicators which come from both internal and external factors. Internal factors often have impacts to value in uses of the asset, while external factor provide info for estimation of fair value less cost to sell.

Examples of internal factors such as:

- Obsolescence/physical damage

- Adverse change in operation

- Deteriorating performance of the asset

- Higher cash outflows to maintain the asset

- Less cash inflows generated from the asset

Examples of external factors such as:

- Fall in market value

- Change in technological, market, legal or economic environment

- Increase in interest rate/rates of return

- Investee’s net asset is higher than its market capitalization

3. Hierarchy for impairment tests assessment and measurement

In which:

- Fair value is the price that would be received to sell an asset or settle a liability in an orderly transaction between market participants at the measurement date.

- Cost to sell are costs directly related to the sale.

- Value in use (VIU) is present value of the future cash flows expected to be derived from the asset.

Cash flow and discounting rate to calculate VIU must be pre-tax.

When estimating cash flows to calculate VIU, it should be noted that:

- Cash flow projection should be based on “reasonable and supportable” assumptions

- Period of cash flow forecast should not exceed five years unless longer period is justified

- Steady or declining growth rate for each subsequent year should be used unless a rising growing rate is justified

- Projection of cash inflows from continuing of the asset

- Projection of cash outflows necessarily incurred to generate the cash inflows from using of the asset

- Net cash flows received/paid on disposal of the asset at the end of its useful life assuming an arm’s length transaction.

An asset’s current condition is the basis for estimating cash flows. Future cash flows associated with restructuring to which the company is not yet committed; or to future costs to add to, replace part of, or service the asset are excluded.

Estimate of future cash flows should exclude following:

(i) Cash inflow/outflow from financing activities

(ii) Income tax

(To be continued)

References

- IAS 36 Impairment of Asset

- Training documents composed by ACCA Vietnam (2017)